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No 732:
Continua of underemployment equilibria reflecting coordination failures, also at Walrasian prices

Alessandro CITANNA, Herve CRES, Jacques DREZE, Jean-Jacques HERINGS and Antonio VILLANACCI

Abstract: In this paper the existence of unemployment is partly explained as being the result of coordination failures. It is shown that as a result of self-fulfilling pessimistic expectations, even at Walrasian prices, a continuum of equilibria results, among which an equilibrium with approximately no trade and a Walrasian equilibrium. These coordination failures also arise at other price systems, but then unemployment is the result of both a wrong price system and coordination failures. Some properties of the set of equilibria are analyzed. Generically, there exists a continuum of non-indifferent equilibrium allocations. Under a condition implied by gross substitutability, there exists a continuum of equilibrium allocations in the neighborhood of a competitive allocation, when prices are Walrasian. For a specialized economy, a dynamic illustration is offered.

Keywords: general equilibrium; underemployment; coordination failures; indeterminacy; (follow links to similar papers)

JEL-Codes: C62; D51; (follow links to similar papers)

33 pages, May 1, 2001

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